Market Bubble? Not Based on Valuation

NEW YORK ( TheStreet) -- I've written countless columns over the past several months indicating that it's been difficult these days to find many stocks that are downright cheap, at least in my view. That does not necessarily mean, however, that the markets are overvalued, per se. In fact, I'm not yet convinced that we are experiencing bubble-like conditions in the equity markets.

Now, that may seem to be contradictory, but can be explained by my belief that markets are neither cheap nor expensive. The S&P 500 is trading at about 18 times trailing earnings and 15 times forward 12-month estimates, and those numbers do not seem ridiculous to me.

I believe that some investors, however, are nervous because the S&P 500 is up more than 150% since bottoming in March 2009, and are convinced that after such a huge run in 4 1/2 years, the market is due for a correction. But by that logic, you get a much different picture if you consider that the S&P is up just 12% -- and that's not annualized -- since January 2000.

As investors, we have very short memories, and tend to anchor to more recent market events. Yes, the S&P 500 is up 150% in the past 4 1/2 years, but the starting point of that rally, a time marked by fear, grossly underestimated the markets true value, just as the Nasdaq Composite's 5000 mark achieved before the tech bubble burst grossly overestimated its value.

Any worries I have about the broad markets at this point have little to do with valuation. I'm more concerned about the plethora of potential storms and storm clouds on the horizon. We are in the midst of a government shutdown, although it has likely had little effect on most citizens so far. However, along with the looming debt ceiling, it does bring with it some near-term uncertainty, and the markets don't like uncertainty.

Other domestic situations such as the Obamacare rollout add further uncertainty, especially if it continues to affect hiring and full-time employment numbers. There's always the issue of potential tapering by the Federal Reserve, which may already be partially priced in, but we really won't know until it actually starts.

Those are just the domestic issues; the Middle East remains a powder keg, and although the markets don't seem to be paying any mind to what might happen, that can turn on a dime if and when some negative event does occur.

While my list isn't long, there are a handful of larger, quality stocks that still appear to be attractively priced to me. These stocks would likely fare better in a market pullback than some of the smaller stocks I own or follow.

Corning ( GLW) trades at 11 times trailing earnings and just 10 times the 2014 average earnings estimate. The company yields 2.7%, and increased its quarterly dividend 33% over the past year. Furthermore, it ended the latest quarter with nearly $5.5 billion, or $3.75 per share, in cash, and should be able to continue returning money to shareholders via buybacks and dividends, a powerful combination in my view. GLW Price / Book Value data by YCharts

Formerly troubled Gannett (GCI) also looks attractive. The stock currently trades at 11 times trailing earnings, and just 8.5 times the 2014 average earnings estimate.

Debt is no longer the issue it once was, as Gannett ended last quarter with $1.36 billion in debt, down from $5.2 billion at year-end 2006.

Currently yielding 3.1%, Gannett increased its quarterly dividend from 4 cents a share to 20 cents between 2011 and 2012. Although it has been held steady at 20 cents for the past seven quarters, given the amounts of free cash flow the company generates, I would expect future dividend increases. Like Corning, Gannett has also been buying back stock. GCI data by YCharts

To sum up, it's not valuations that are worrisome at this point, it's the "noise." A little dry powder here is not a bad thing.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the
Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.